By Stella Qiu and Wayne Cole

SYDNEY (Reuters)

Australia’s central bank reiterated that interest rate cuts were unlikely in the near term as it held policy steady, softening its hawkish stance by saying monetary tightening was not discussed.

Governor Michele Bullock noted that the board did not actively consider raising rates but discussed the potential for changing its hawkish messaging.

The Australian dollar reached a nine-month high of $0.6869 before retreating to $0.6820 following Bullock’s comments. Futures rose slightly as markets estimated a 72% chance of a rate cut by year-end.

In its September policy meeting, the Reserve Bank of Australia (RBA) maintained rates at a 12-year high of 4.35%, emphasizing the need for sufficiently restrictive policy to bring inflation back to target.

The board stated, “While headline inflation will decline for a time, underlying inflation remains too high.” It stressed that policy must be restrictive until they are confident inflation is moving sustainably towards the target.

Markets anticipated this steady outcome due to persistent underlying inflation and a resilient labor market. Bullock clarified that the board did not explicitly consider a rate hike during this meeting but discussed whether messaging should shift.

According to Bullock, the board does not foresee interest rate cuts in the near term, emphasizing the cash rate of 4.35% is deemed restrictive enough to control inflation while maintaining employment gains.

With underlying inflation at 3.9% last quarter and a strong job market, there is no immediate urgency to ease policy, unlike the Federal Reserve’s recent cut. The RBA is already behind other central banks in reducing rates; political pressure is mounting for easing. The left-wing Greens demanded the government secure an interest rate cut in exchange for parliamentary support on delayed RBA reforms.

Shane Oliver, chief economist at AMP, stated that while the RBA did not explicitly consider a rate hike, its language remains mildly hawkish, predicting that rates have peaked and a cut may occur in February next year. A cut remains possible by year-end if unemployment and underlying inflation rise sharply.

Market sentiment received a boost from China’s central bank, which announced cuts to reserve requirements and lending rates, including for existing home loans. Investors are now awaiting August’s monthly inflation data. Headline inflation is expected to have slowed to 2.7% annually due to government electricity rebates, but core inflation may still indicate persistent high prices.

Bullock warned against complacency, stating that even with a rate showing a two in front of it, inflation may not be under control and could still be unsustainably outside target ranges.